Countering the Liberal Meme on the Mortgage Crisis

The liberal meme on the mortgage crisis is best verbalized by Barack Obama. Often in debates, he proclaims that the current financial meltdown is the final verdict on eight years of disastrous economic policies. This is one of those statements that works well politically but it wouldn't stand up to any sort of significant scrutiny. For instance, President Bush inherited an economy on the brink of crisis. His tax cuts turned that economy from the brink of crisis toward a recovery in remarkable fashion. Second of all, Fed policy during Bush's administration has been disastrous. Essentially, the liberal meme is that this crisis occurred because the Bush administration abhorred any and all regulation and he allowed greedy capitalists to run wild with no supervision and the result is the mess we have now. As such, this crisis proves, once and for all, that regulations are good not bad, and that free markets must be contained and controlled vigorously by a central government.

This meme falls apart under any sort of scrutiny. First, mortgages are among the most regulated industries anywhere. Anyone who has ever closed on a property knows all too well just how regulated they are. Closing documents number in the hundreds, and that's the closing documents. There are almost thirty documents to sign prior to closing. All of those signatures happen because of a regulation that banks must follow. If there are any more regulations in mortgages, it will take borrowers days not hours to close on a loan. Of course, borrowers only see a small fraction of all the regulation the industry imposes on the professionals that work in it. To say that the mortgage crisis started because of deregulation in the mortgage industry is to show shocking naivete to how the business operates.

In fact, the only specific form of deregulation that any liberal can point to is the 1999 bank deregulation law. How, I would ask, did bank deregulation cause the mortgage crisis? To this they have no answer. Bank deregulation didn't cause sub prime entities to loosen their standards. The two things are separated. In fact, most of those that scream about this 1999 legislation have no idea what it did. If anything, what the 1999 legislation did is help turn a mortgage crisis into a financial services crisis. That's because by bringing down the proverbial wall between banks and other financial institutions, it allowed more players into the mortgage market. There is other evidence that deregulation poured gasoline on this crisis. Robert Novak details how the unregulated credit swaps market created a sort of shadow banking system. All of these forms of deregulation allowed for bad loans to spread like a cancer. They didn't create the bad loans in the first place.

What allowed for these bad loans to be created was not deregulation but rather a lack of enforcement. Most of these so called toxic loans are fraudulent. Whether it is made up income, assets, living status, or rental income, these loans were done under false pretenses, en masse. There needs to be no new regulation to outlaw fraud. That was always illegal. It was however not enforced. For this, the Bush administration deserves plenty of blame. Yet, if liberals make this about enforcement and oversight, then they will also have to admit that Barney Frank, Chris Dodd, et al looked the other way while Fannie/Freddie continued to make increasingly risky investments and didnt' oversee them. As such, trying to pin the blame on one party, if the blame is a lack of enforcement, is disingenuous.

This brings me to my final point about the viability of free markets. If this was a lack of enforcement of basic honesty, in the form of fraud, then it is not only unfair but wrong to blame the free market and unfettered capitalism for this. No market, free or otherwise, could possibly function properly when it is inundated with fraud on a mass scale. Of course, the free market for real estate blew up. It was infiltrated with an obscene amount of fraud. All those that looked the other way while it happened must be held responsible for its materialization. Yet, that doesn't mean that this crisis is proof that free markets can't function without strict government oversight. What it means is that even free markets demand honesty from its players. Recognizing that this crisis was caused, as its nexus, by fraud is vitally important. Folks like Barack Obama proclaim that this proves we need a 21st century regulatory system. We don't. All we really need is a renewed commitment to the basic tenets of every century's regulatory framework. That is that fraud is unacceptable and must be prosecuted vigorously.

For fairness, here is how I challenge the meme for the opposite ideology.

Finally, for a detailed account of how we got into this mess check out this link.